LECTURA 4 2005 Performance Measurement and Control

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PERFORMANCE MEASUREMENT AND CONTROL IN

LOGISTICS SERVICE PROVIDING

Elfriede Krauth, Hans Moonen*


Rotterdam School of Management, Department of Decision and Information Sciences
Erasmus University Rotterdam, Burg. Oudlaan 50, P.O.Box 1738, 3000 DR, Rotterdam, The Netherlands
E-mail: ekrauth@rsm.nl, hmoonen@rsm.nl
Authors ranked in alphabetical order. * = Corresponding author (Room F1-26, Telephone: +31 10 408 1403, Fax: +31 10 408 9010)

Viara Popova, Martijn Schut


Department of Computer Science, Faculty of Sciences
Vrije Universiteit Amsterdam, De Boelelaan 1081a, 1081 HV, Amsterdam, The Netherlands
E-mail: popova@few.vu.nl, schut@cs.vu.nl

Keywords: Key Performance Indicators (KPI), Planning Systems, Logistics Service Providers, System Development
Abstract: Output of a planning process is a set of assigned individual tasks to resources at a certain point in time.
Initially a manual job, however, in the past decades information systems have largely overtaken this role,
especially in industries such as (road-) logistics. This paper focuses on the performance parameters and
objectives that play a role in the planning process. In order to gain insight in the factors which play a role in
designing new software systems for Logistical Service Providers (LSPs). Therefore we study the area of
Key Performance Indicators (KPI). Typically, KPIs are used in a post-ante context: to evaluate a company’s
past performance. We reason that KPIs should be utilized in the planning phase as well; thus ex-ante.
The paper describes the extended literature survey that we performed, and introduces a novel framework
that captures the dynamics of competing KPIs, by positioning them in the practical context of an LSP. This
framework could be valuable input in the design of a future generation of information systems, capable of
incorporating the business dynamics of today’s LSPs.

1 INTRODUCTION introduce the KPI field (section 2). Then, we


undertake a literature review in the areas of supply
chain management and LSPs (section 3). Building
Planning is the process of assigning individual tasks
to resources at a certain point in time. Originally, upon, we compose a framework for logistical KPIs,
considering a multi-dimensional and multiple
planning was a manual task, performed by a human
stakeholder perspective (section 4). Section 5 covers
planner. Over the last decades information systems
have increasingly taken over this role in industries validation. Future research directions and
conclusions are discussed in section 6.
such as road-logistics; in practice however the
human planner has still a considerable role. In order
to make the transition from planning input to
planning output, a planning system – manual or 2 LOGISTICS SERVICE
computerized – must employ the proper objectives PROVIDERS AND KPI’S
to derive to an optimal planning. To gain insight in
this area, we consider the Key Performance
The increasing focus on core competencies opened
Indicators (KPI) literature. KPIs are typically used in
a post-ante context: to evaluate the past performance up many business opportunities for Logistics Service
Providers (LSPs) (Christopher, 1998). LSPs, often
of a company. We reason that KPIs could be utilized
also referred to as Third Party Logistics Service
in the planning phase as well; ex-ante.
The research question we pursue with this paper Providers (3PLs), carry out the logistic activities for
one or more companies within the supply chain;
is: Which are the performance indicators that have
functioning as an intermediary (Lai et al., 2004). The
an impact on operational performance of logistics
service providers? We briefly describe the Logistics functions of 3PLs or LSPs can be divided in:
warehousing, transportation, customer service, and
Service Providers (LSP) industry and shortly
inventory and logistics management (Sink et al., business performance versus individual order
1996), (Vaidyanathan, 2005). performance, and the principles of supply chain
Logistics service providing is an industry under management (steering a chain of companies versus
great pressure. Margins are small, and therefore solely steering one’ s own company). Note that the
LSPs continuously seek for opportunities to make perception of performance is relative: cost efficiency
their business more profitable. That can be, for may be one of the important measures for an LSP,
example, by scaling up or expanding their activities still this might not be what the shippers and
outside their home country (Lemoine et al. 2003). consignees desire – they would instead prefer high
Planning and control is crucial for the operations quality and low price (Lai et al., 2004).
of an LSP: both for the day-to-day operations as well In the literature we identified two major
as the more long-term strategic objectives. A good perspectives. First, there is a clear split between
insight in performance information and therewith performance indicator related research that focuses
steering mechanisms for planning is important. on internal operations of an individual firm, versus
Historically, companies concentrated on financial literature that takes the supply chain perspective and
indicators. Nowadays it is widely recognized that seeks to optimize inter-organizational performance.
non-financial and even non-numerical indicators can For one exception we refer the reader to Gibson et
give valuable information as well (Brewer et al, al. (2002), which compared how shippers and
2000, Ittner et al., 2003). Such indicators though are carriers rank service. The second perspective relates
more difficult to measure and compare. to the use of performance indicators; in general the
Selecting the right indicators for measuring (and indicators are used either at the strategic level, for
steering!) however is rather complicated. A full set performance evaluation, or at the highly operational
of indicators could result in a huge amount of data level, for planning and control. In the next sections
which would require a lot of efforts and high costs we review the different sources of literature.
both in acquiring and analyzing. Another difficulty
is that it is not uncommon that the selected 3.1 Supply chain performance
indicators turn out to be conflicting – improving one
may worsen another.
LSPs are specialists in supply chain management,
Performance indicators are to a large extent
domain specific. Our research focuses on the area of and are generally well aligned with the type of
supply chain they serve. Fisher (1997) makes a split
third-party logistics. But even here no unique subset
between efficient and responsive supply chains.
of indicators can be selected. The choice is company
specific and depends on the goals, state and Christopher et al. (2002) make a similar distinction
into lean and agile. Weber (2002) is using a
orientation of the company. Therefore it is
hierarchical model to measure supply chain agility.
worthwhile to first concentrate efforts on providing
aid in the selection process. The existing literature The Supply-Chain Operations Reference-model
(SCOR) offers a model with standards to describe
on performance measurement in logistics provides a
supply chains (SCOR, 2003). Measurements which
large number of potentially useful indicators.
can be used to measure efficiency or leanness of
LSPs include fill rate of delivery plans, empty-to-
loaded backhaul mile index, equipment utilization
3 LITERATURE REVIEW rates (hours), equipment utilization rates, vehicle
maintenance costs. Metrics to measure
KPIs are used to evaluate the past performance of a responsiveness or agility include export shipment
company: making it possible to compare processing time, delivery performance to customer
performance with previous periods of measurement, requested date, customs clearance time.
or industry standards or even individual competitors. A strong partnership emphasizes direct, long-
Consequently, any logistical system should try to term collaboration, encouraging mutual planning
optimize and steer its decisions to the metrics it later and problem solving efforts.
shall be evaluated upon. A clear insight into the Another important point is the use of information
factors that drive logistical operations provides us systems (Sander, et al. 2002); as well as the type of
with adequate planning objectives. systems. Information systems support the integration
In this paper, we review the different theories of inter-organizational processes (Hammer, 2001).
and empirical findings known in literature on KPIs For an LSP information systems revolve around four
in (road-) logistics. We specifically include elements major players: the LSP’ s customer, the customer’ s
such as the multi-dimensionality of companies clients, the customer’ s suppliers and alliances, and
(several hierarchical planning levels as well as the LSP provider itself (Vaidyanathan, 2005). Ross
relevant business functions per company), general (2002) shows that IT investment can have a positive
impact on market performance as a result of better order fill lead-time and goods in transit. Quality and
coordination in the value chain. However, putting the way the information is exchanged determine the
such a high level of collaboration into practice is not delivery performance to a large extent; possible
easy. Both information quality and relationship performance indicators are: number of faultless
commitment play an important role (Moberg et al, invoices, flexibility of delivery systems to meet
2002). As Kemppainen et al. (2003) suggest; it is particular customer needs. Measures of customer
neither feasible nor profitable to have strong service and satisfaction are flexibility, customer
collaboration with all supply chain partners. LSPs query time, and post transaction measures of
should select key customers and focus on these customer service. See (Fowkes et al. 2004) for a
relationships. This then might result in different discussion on the reasons for delay and how
types of inter-organisational systems: hierarchies reliability and predictability is valued in industry.
and/or markets (Graham et al., 1994), (Toni et al, Mentzer et al. (1991) study performance
1994), (Lewis et al, 2000). evaluation in logistics. They identify a list of
performance measures in five sub-areas of logistics.
3.2 Performance management from They differentiate between: labour measures
(loading, driving, general labour), cost measures,
an internal company perspective equipment measures, energy and transit-time
measures.
Whereas supply chain performance evaluation can Closely related to performance management, are
take many identities as has been shown above, modern accounting methods, such as Activity Based
researchers agree on internal measurement, cost Costing (ABC) (Pirttila et al., 1995; Themido et al.,
calculation and performance evaluation methods. 2001). ABC differs from traditional cost accounting
Company-centred performance management focuses by tracing costs to products according to the
on the measurement and evaluation of decision activities performed on them. ABC has gained
making on company performance. acceptance within manufacturing; however, most
In the 1990s Van Donselaar et al. (1998) companies have not yet extended ABC to logistics
performed a large-scale study in the transportation operations. In theory, the application of ABC within
and distribution sector in the Netherlands. They an LSP would make it possible to trace costs to
focused on logistics performance from the specific orders, customers, or supply channels.
provider’ s point of view – where they make a
division between distribution and transportation.
Their findings include the attractiveness of long trips
3.3 Planning levels
for long-distance transportation (which might be
influenced in the order-intake process). Furthermore A company is usually divided into the levels
they show that a lower percentage of empty miles strategic, tactical and operational. Gunasekaran et al.
(of total miles driven) leads to better results. Finally, (2001) assigned metrics to the appropriate
combining (international) shipments might be management level. Van Donselaar et al. (1998)
beneficial, though it consumes more handling time. distinguish between segments, which are marked by
UPS executive Peter Bromley (2001) lists the big the different services that are offered to customers.
five KPIs important for UPS Logistics: on-time The relevant costs on segment level were variable
receiving, on-time shipping and delivery, order costs (fuel, tyres, maintenance, etc.), direct costs
accuracy, inventory accuracy, returns cycle time. (depreciation, insurance, leasing, etc.) and driver
Although low costs are important for UPS, the wages.
perfect customer experience (through a perfect Lohman et al. (2004) perceive performance
service) seems to direct its business processes; for measurement systems as process control systems. If
other LSPs this may be different. there is discrepancy between the actual and desired
Similar findings were reported by Menon et al value of a metric, knowledge about the behaviour of
(1998) who list the most important factors relevant the organization is used to modify the process. At
for customers in their selection of an LSP. Most the tactical or strategic level the control loop is used
important are: speed and reliability, loss and damage to evaluate the operational level and adjust its goals.
rate and freight rates (tariffs).
Delivery performance can be measured by on- 3.4 Measuring the un-measurable
time delivery. This determines whether a perfect
delivery has taken place or not, it thus measures It is compelling to note that most literature focuses
customer service. Stewart (1995) identifies the on numerical factors such as: cost, time, faults, IT
following as the measures of delivery performance: utilization. Environmental factors, customer
delivery-to-request rate, delivery-to-commit date, perceptions, employee happiness, et cetera are
hardly covered in logistical performance indicator services the company offers. Increasing the price
literature. An exception is the balanced scorecard will bring more profit which is desirable for the
which provides a formalized mechanism to achieve a company. The customer, however, prefers low
balance between non-financial and financial results prices. The society on the other hand is clearly not
across short-term and long-term horizons and is so concerned with prices alone but more with the
based on the notion that companies have to aim at a economic climate as a whole, e.g. how to increase
true integration of marketing, production, the competition, fight monopolies, etc. Employees
purchasing, sales and logistics (Brewer et al., 2000). are in general not so concerned with the prices but
The balanced scorecard distinguishes four main with their work conditions. Another example would
perspectives (Kaplan et al., 1992): customer, be labour efficiency. Management is interested in
internal, financial, innovation and learning. The maximum utilization of labour which, without
managers need to create their own version of the applying restrictions, will lead to overexploitation.
balanced scorecard and concentrate on the most This naturally comes in conflict with the point of
critical measures. view of the employees. The society might be
Knemeyer, et al. (2003) study the perspective of concerned with cases of overexploitation on a large
a customer. If the customer perceives that the LSP scale that leads to drastic increases in accidents,
focuses on the interaction between the companies strikes disrupting traffic or health insurance issues.
and is concerned with winning and keeping the The vertical axis in Figure 1 divides the
customer, the relationship can be strengthened. performance indicators in long-term and short-term.
Stank et al. (2003) examine how relational, This distinction has been previously used in other
operational and cost performance relate to customer research (e.g. Gunasekaran et al, 2001) and is
satisfaction, loyalty and market share. accepted as a meaningful division that the decision
The internal business perspective translates the makers find applicable. Short term indicators can
customer perspective into what the company must be measured for example within the period of a
do in order to meet its customer’ s expectations. But month. The final choice of short term indicators
the targets for success keep changing; and thus depends on organizational strategy and
innovation is needed. For LSPs innovations can measurements costs. For instance, an organization
include additional activities, regions, transport aiming at maximizing its total number of driven
modes and communication systems e.g. RFID or kilometers would want to report this on a daily basis.
WebServices (Chapman et al., 2003, Lemoine et al., Progress in information and communication
2003). Financial indicators measure if the technology might lower costs for more granular
company’ s strategy, implementation and execution measurements. Long term performance indicators
contribute to bottom-line improvement. are measured over longer periods of time.
The classification discussed so far is very
general. It incorporates all relevant points of view
but does not provide structure within these
4 OUR FRAMEWORK viewpoints. Thus we extend it in this direction. An
extra extension has been added for the management
The literature overview presented in the previous point of view, the KPI scheme has been further split
section supports the view that a new framework for in four categories; see the lower part of Figure 1.
performance indicators can be beneficial in the area The reason for only enriching the management point
of third party logistics. We consider different points of view is that we expect it to accumulate a richer
of view (both internal and external) on the collection of indicators where further refinement
company’ s performance. Figure 1 presents the will be necessary. We differentiate between the
general scheme of our framework. On the horizontal following four categories:
axis we separate the different viewpoints Effectiveness – Effectiveness measures the
corresponding to the parties involved. The internal capability of producing an intended result. It thus
point of view is represented by the two parties concerns the ‘outside’ of the organization – what
within the company – management and employees. results does the organization achieve?
The external point of view shows the perspective of Efficiency – Efficiency is the measurement for
the customer and the society. producing results taking into account used resources.
The motivation for including four different It thus refers to the ‘inside’ of the organization –
points of view comes from the fact that in many how does the organization achieve its results? We
cases they will be conflicting and, in order to may also say that efficiency measures the ratio
achieve a balance, the management should be aware between input and output.
of the needs and desires of all parties involved. Satisfaction – Satisfaction represents the human
Consider for example the prices for the logistics factor in our model. All organizational achievements
may be optimal regarding effectiveness and new agent-based software system for road-logistics
efficiency, the people in the organization should still planning.
be able to do their work to some degree of
satisfaction. In this way, it makes the performance 5.1 Expert interview
optimization problem of the organization more
constrained.
The interviewee prepared for the interview by
IT and innovation – An organization must also
be concerned with its future performance. As such, reading a draft version of this article, i.e. the
literature review, and the definition part of the
innovation and IT utilization are indispensable
framework. The semi-structured interview lasted for
factors for measuring long term performance. An
organization that is working optimal now may not be one-and-a-half hours. The interviewer started with a
short introduction. He explained in ten minutes what
the best tomorrow if it does not take its own
the purpose was of this interview, what has been
circumstances into reconsideration constantly.
We applied this framework to our extensive done so far, and what future plans were.
Furthermore he made clear why especially this
collection of performance indicators; for results see
interviewee was selected. Over the next seventy-five
Table 1.
minutes, the interviewee gave his vision on
5 FRAMEWORK EVALUATION performance measurement and performance
indicators. His thoughts were guided by twenty
We present here preliminary validation results years of logistical industry experience. At the end of
the interview, the interviewer used five minutes to
although validation is at the time of writing not yet
summarize the points discussed in the interview,
completed. We conducted an expert interview to
cross-validate our model with feedback from which were confirmed by the interviewee. The
results of the interview are presented below, in Table
industry. We plan to conduct field studies with two
2; it contains a summary of the most relevant aspects
LSPs (i.e. with management and planners). After
finishing our evaluation, we intend to use the discussed during the interview; before publication it
was checked with the interviewee.
framework and its indicators in the development of a

Figure 1: High-level framework to cluster KPI’s relevant for LSPs

Table 1: List of clustered performance indicators for LSPs


Internal perspective - Management point of view
Effectiveness
Revenue Total number of orders Long term plans availability / development
Profit margins Number of customers Market share width
Capacity utilization Number of new customers Number of markets that have been penetrated
Km per day Number of regular customers Successful contacts – % of successful deals out of the initial offers
Labour productivity Number of profitable customers Effectiveness of distribution planning schedule
Price Continuous improvement, rate % of orders scheduled to customer request
Turnover per km Product range % of supplier contracts negotiated meeting target terms and
Number of deliveries Plan fulfilment conditions for quality, delivery, flexibility and cost
Benefit per delivery Total loading capacity (for trucks) Competitive advantage
Trips per period On-time delivery performance
Perfect order fulfilment
Efficiency
Total distribution cost Average fuel use per km Overhead/management/administrative costs
Labour utilization Average delivery re-planning time Quality of delivery documentation per truck/driver
Overhead percentage Marketing costs Effectiveness of delivery invoice methods
Overtime hours Failure costs % orders / lines received with correct shipping documents
% Absent employees Prevention costs % product transferred without transaction errors
Salaries and benefits Appraisal/Inspection costs Item/Product/Grade changeover time
Controllable expenses % of failed orders Order management costs
Non-controllable expenses % of realized km out of planned km Supply chain finance costs
Customer service costs Performance measurements costs Total supply chain costs
Order management costs Human resource costs Total time in repair (for trucks)
Inventories Variable asset costs Ratio of realized orders vs. requested orders
Number of trucks in use Fixed asset costs Average delivery planning time
Total delivery costs Information system costs
Satisfaction
Attrition of drivers On-time delivery performance % of orders scheduled to customer request
Morale, motivation of personnel Number of customer complains Overall employees satisfaction
Overall customer satisfaction Overall society satisfaction
IT and innovation
Information system costs Number of new products in the range % of information management assets used / production assets
Up-to-date performance % of information exchange through IT % of invoice receipts and payments generated via EDI
information availability % of employees with IT training Average time for new products development
Utilization of IT equipment Availability of IT equipment Average costs for new product development
IT training costs
Internal perspective – Employee’s point of view
Km per trip Weight to (un)load per labour hour Salaries and benefits
Working conditions
External perspective – Customer’s point of view
Transportation price Transparency for a customer Services variety
Insurance price
Primary services price
Possible types of communication
Available types of goods insurance
 Order configuration flexibility
Possibility to change order details
Goods safety size flexibility Additional services price (priority transportation)
Product variety Timeliness of goods delivery Contact points (number of people to contact)
Response time
External perspective – Society’s point of view:
Level of CO2 emission Solid particles emission Competition level among similar companies
Society satisfaction 
   Taxes to the national treasury Care for animals/children around
resources Participation in charitable actions Use of innovation technologies
Recycling level Reputation of a company Development of innovation technologies
Employees satisfaction Road maintenance costs Cooperation with other companies
Disaster risk Number of available work places

Table 2: Expert Interview


In traditional Operations Research (OR), operations are often rated and optimized upon a small set of parameters only –
sometimes only one single parameter. This results however in non-optimal system behaviour. Consider the example of
empty-kilometer minimization. This optimization often results in trucks standing still, waiting for a next order (preferably
with a starting point equal to the place of waiting). Trucks do not anticipate on the next order (in a more fruitful region).
Often waiting time does cost money as well – the driver needs to be paid and the truck could have been utilized for other
purposes. Reviewing single optimization parameters can hardly be seen separate from other indicators, as the following
indicates: Let us consider an LSP that has a truck driving around with only one small package – so, it uses only 5% of its
carriage capacity – utilizing a very inefficient route, with lots of detours. It is however not driving around empty – so from
an empty-miles perspective this truck operates very effective. Although we do realize that the truck could have carried more
cargo, and the route it took could have been more efficient. However, we do not know yet whether the customer is actually
paying for this trip – because if so, no LSP would mind to have a truck driving around via an inefficient route, with only
little cargo as long as the customer is paying a good price.
Not all indicators do have a direct translation in costs, or financial measurements, but do translate in, for example, extra
appreciation from the customer. An interesting example is Cehave – a Netherlands based organization active in the agri-
business. When delivering feed products to farmers, farmers prefer and value it to be the first farm on the delivery-
roundtrip, since with each extra visit (between Cehave’ s plant, and the farm) the risk on animal diseases and infections
rises. The paradox however is that, although farmers prefer the service of being the first customer, they are not willing to
pay for this service.
Agility is more-and-more required for LSPs business operations. It is very important to have a flexible business
infrastructure, capable of quickly reacting and adapting to changes in operations: new orders, re-routing of a truck, or
handling changes in the environment (such as a traffic jam). Therefore quick react capabilities are of true importance;
measuring these however is a complex matter.
Planning systems targeted at such industries could well be build by using agent technology, and dynamic systems
(control) structures; utilizing measurement and reaction mechanisms to derive to smart decisions. [We] believe that smart
local decision making, making the right decisions at the right moment and right place are likely to result in well behaving
planning systems. Feedback plays an important role in such systems. Performance measurement should not only look at the
parameter as such, but also at the way those parameters change (and behave) over time – thus be aware of the first or second
derivative of the function as well.
The framework as presented in this paper is very interesting. It is finally an attempt to have a complete scheme, looking
beyond just financial indicators, and especially dedicated for the logistical industry. It measures more than solely costs, like
it also captures perceptions (of management, customers, employees at different levels, et cetera). A very useful division is
the split between the strategic, tactical, and operational time-domains. It might furthermore help in overcoming problems in
supply chains that want to assess chain wide performance. However, some adjustments and generalizations might be
needed.
Critical notes on the work include: a subdivision/refinement as was made for the classification of the management
point-of-view (see Table 2) should be made for all the categories as mentioned in the framework, thus including employees,
customer and society as well. Therewith the framework becomes three-dimensional. Be aware that optimal, does not mean
the same to all companies. Optimal for one company, can be far from optimal for another company.
Interesting aspect of the presented work is that it could serve as a tool that makes performance indicators, and therewith
system-control a discussable issue in an organization – which would be a real valuable tool to evaluate current systems, and
to design future systems. The true advantage of this approach is that it could be relatively easy translated into an agent-
based software system. With software agents monitoring and controlling single performance indicators, and steering upon
these.

agent-based software system for road-distribution


planning. In such a system we represent the
6 CONCLUSIONS involved logistical parties as agents operating
within a multi-agent system. In order to give the
The contribution of this paper is twofold. Firstly, agents the proper decision objectives, insight in
we present a literature survey on the concept of logistical KPIs is needed. Finally, we are currently
performance indicators in logistics. Secondly, we developing a formal language for expressing the
present a framework capturing the dynamics of relationships between the indicators and reasoning
performance indicators for LSPs including an about these, drawing inspiration from the field of
extensive list of LSP performance indicators. requirements engineering.
The literature survey identifies a number of
studies on performance measurement/evaluation
for logistics. However, these studies are mainly on
a particular area or case and are focused on ACKNOWLEDGEMENTS
external and quantitative indicators. Our review
has considered the areas of supply chains, internal This work is part of DEAL (Distributed Engine for
company performance, planning and qualitative Advanced Logistics) supported as project
indicators. EETK01141 under the Dutch EET programme. For
The framework that we present is a first step this particular paper we are very grateful for the
towards our long term aim to use performance contributions of Jos van Hillegersberg, Peet van
indicators ex-ante rather than post-ante. The model Tooren, Jan Treur, Steef van de Velde, and Pinar
considers indicators along two main dimensions. Yolum.
On the one hand we look at the perspective:
internal (management, employees) and external
(customer, society); on the other hand we classify
indicators as short-term or long-term. We identify
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